Dream11, other eGaming companies face potential tax bouncer on GST : 29-04-2019

The indirect tax department has started questioning some of the leading online fantasy gaming companies to ascertain if there is a revenue leakage on account of the methodology used by these platforms to calculate and pay goods and services tax (GST), people familiar with the development said.

Essentially tax officials want to determine if GST is applicable on the total transaction value or the net commissions (revenues) that accrue to these gaming firms.

Fantasy sports is beginning to take off in India. Mumbai-based Dream11, which recently entered the coveted unicorn (startups with a valuation exceeding $1 billion) category, is widely seen as the industry leader.

Some state-level tax authorities have begun an exercise to determine whether GST should be applicable on the entire contest entry amount, which includes users’ contribution to the prize pool, or the gross revenue earned by the operators and online companies.

Executives from half a dozen gaming companies were questioned by the tax department.“The valuation rules (under GST framework) are quite clear that GST is levied on the consideration and currently there is no clarity as to whether the revenue charged by these companies be considered consideration or the total pool. In March some companies were asked to explain why they shouldn’t be paying GST on the total pool,” said a tax official aware of the development. He said that some of the Bengaluru-based companies were questioned and that no tax demand has been made as yet.

After queries were sent by the tax department, the Indian Federation of Sports Gaming (IFSG), an industry body, representing about 26 gaming companies, like Mumbai-based Dream11, Fantain, My11Circle and FanFight, among others have reached out to the Ministry of Finance and the GST committee for clarity on the issue .

Dream11, the largest player in the online fantasy sports industry, said it pays 18% GST on its gross consideration (commissions) and is compliant with the current tax regulations .

“We pay GST on the gross consideration collected by our platform and not on our margins. Levying GST on user deposits would mean that it’s paid only once when users make their deposits and not every time they play in our contests with their winnings as well, which is when Dream11provides a service to them. This is the same practice followed globally in every mature GST-following country. GST for online gaming companies is charged on their Gross Gaming Revenue,” said Harsh Jain, cofounder  & CEO, Dream11, which was valued at $1.1 billion in its latest financing round.

To illustrate what is potentially at stake, consider an example where two players want to lay bets on the outcome of a match. To do this they would first deposit money in an escrow account of a bank—through the gaming app platform. If the amount is Rs 200 each, the fantasy gaming platform would deduct their commission from this amount which could be Rs 40 (20% of Rs 200). The 18% GST would be levied on this amount i.e Rs 40 and the winner of the bet would get Rs 160 which is the prize pool

The question raised by the tax authorities is—should GST be paid on Rs 40 or on Rs 200?

The difference could be huge for the companies and it could “shut down our business” claimed a top executive with one of the firms.

The gaming companies are currently paying 18% GST on their revenue. So, in this example, the online gaming company is paying Rs 7.2 as GST whereas tax department wants Rs 36 as GST (18% of Rs 200).

Experts say tax litigation is inevitable if no clarification is provided by the government. Some tax experts pointed out that as per the valuation regulations, GST has to be paid on the whole transaction (total bets) and not a common mark-up (commissions).

People in the know say that the tax department would look at the “fact pattern” of the case when they scrutinise these transactions. They said, as per the valuation rules, GST is to be paid on the total consideration.

The only exception to the rule, according to the people cited, could be deposits. But as per definition a deposit is a sum of money paid by and returned to the same individual— which is not the case with online gaming.

“It’s not clear as to whether the facts of the case would substantiate that the amount received initially would be tantamount to ‘deposit’ or transaction in money. The fact that the amount goes to an escrow account at first does help but it’s likely that the authorities would closely scrutinise the issue,” said Pratik Jain, partner and national leader, indirect tax, PwC India.

Essentially, tax experts say that while online gaming companies may argue that GST is only applicable on the money they charge for the services, in the absence of a clarification, tax notices may be issued leading to litigation.

“Contribution to a fund for prize money should not be considered as a price for the supply of services provided by the organiser of the online games. But there is a need for the government to issue clarifications setting the credible ground rules,” said Uday Pimprikar, partner & national leader, indirect tax, EY India.

“The companies could also approach the Authority of Advance Ruling as well. The tax department wants a clarity on the issue and in the absence of similar business models, there is no precedent,” said the tax official cited earlier.

Further, Dream11and other such fantasy gaming companies are relying on a Punjab High Court judgement declaring it skill-based to differentiate itself from being clubbed under gambling or lottery, where GST is applied on the gross lottery collection at 28%

Source : Financial Express

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